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Edited by Joanne Evans and Lester C. Hunt
Chapter 2: The Theory of Energy Economics: An Overview
Thomas Weyman-Jones 1 Introduction In reality there is no such subject as energy economics, because energy, although a meaningful concept in the physics or engineering sense, is not a commodity that can be bought and sold in the marketplace. However, individual fuels (primary and secondary electricity, natural gas, oil, coal) can be bought and sold; in this context, primary electricity includes renewable sources and nuclear power. Therefore ‘energy economics’ is really the economics of fuel markets, and the phrase: energy economics is used for convenience to represent all the useful economic concepts which arise in studying different fuels. The energy industries are organised in different ways in different countries; many are investor owned, especially in the USA and the UK, but state ownership is also common. Many are characterised by economies of scale and hence have considerable market power, which usually leads to them being regulated. Fuels are widely traded in solid, liquid and gaseous form, and are transported all over the world in tankers, pipes and wires. In some of these fuel markets we can see that it is cheaper to have one company do all the business rather than many. Examples are the national power and gas grid companies engaged in the activity of bulk transmission of electric power and natural gas. Such companies are traditionally referred to as public utilities (although there is no presumption that they are or should be owned by the state). Because these companies are believed to operate most cheaply or efficiently when...
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